Let's talk about 'double promotes'
"Double promote" scenario:
Pension fund invests in real estate fund, which invests in local operator's development deal. Real estate fund and operator get incentive-based compensation (promotes).
Natural question the pension fund asks itself:
Why am I paying two promotes?
Natural questions the pension fund DOESN'T ask itself:
Am I undervaluing what the real estate fund brings to the table?
Am I staffed and skilled to do the following...
Identify target deal types
Review GP / sponsor
Review sponsor track record
Review sponsor team
Review sponsor co-investment
Review deal summary
Review underwriting model
Stress test assumptions
Review development budget
Review construction schedule
Review entitlement status
Review market studies
Review leasing assumptions
Review capital stack
Review financing terms
Review downside case
Review exit strategy
Prepare internal IC memo
Compare deal to alternatives
Approve or reject investment
Negotiate JV economics
Negotiate governance rights
Negotiate reporting requirements
Review legal documentation
Approve final documents
Fund equity contribution
Manage capital calls
Track unfunded exposure
Review construction reports
Review budget vs actuals
Review change orders
Review leasing updates
Review operating projections
Monitor covenant compliance
Exercise consent rights
Approve refinances
Review exit recommendations
Approve sale
Review distribution calculations
Receive distributions
Decide on additional funding
Decide on restructurings
Engage counsel if disputes arise
Monitor valuation marks
Report internally
Close out investment
Hypothesis 1: Many pensions may soon be reminiscing about the days when they had promotes to share.
Hypothesis 2: Most analysis of double promote costs is deeply flawed, and presenters/consultants know it, but they include the talking point because it's a simple hot button issue for pension fund managers.
PS -- When discussing an issue like this, it's helpful to define terms (e.g., allocator, operator, etc.) Here's a description from a forthcoming case study. Interested in building these types of skills and familiarity? DM us to explore joining our upcoming FastTrack cohort.
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